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Cablegate: Romania's Parliament Passes 2005 Budget

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 BUCHAREST 003414

SIPDIS

SENSITIVE

STATE FOR EUR/NCE - WSILKWORTH, EB/IFD
STATE PASS USTR - LISA ERRION
TREASURY FOR STUART
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/CEEB/BURGESS/KIMBALL
STATE PASS USAID

E.O. 12958: N/A
TAGS: ECON ETRD EIND EFIN RO
SUBJECT: ROMANIA'S PARLIAMENT PASSES 2005 BUDGET


This cable is sensitive but unclassified. Handle
accordingly

Summary
-------
1. (U) In anticipation of the November 28 general
elections, Romania's Parliament rushed to pass the budget
this year, bypassing substantive debate. Both the 2005
state budget and social assistance budget laws, passed by
both legislative chambers on November 10, and ratified by
President Iliescu on November 22, changed little from the
draft budget laws reviewed by the IMF and submitted to the
Parliament in October. The budget anticipates a deficit of
1.5 percent of projected GDP. End Summary.

Parliament passed the 2005 budget with record speed
--------------------------------------------- ------
2. (SBU) In an unprecedented move, the Senate and Chamber
of Deputies gathered in a joint session to debate the budget
provisions expeditiously. Several members of Parliament
were absent for the budget vote due to election campaign
obligations. A few also used their absence as a protest
against the superficial nature of the budget debates and the
scant attention given to opposition proposals. The ruling
Social Democratic (PSD) party expressed its satisfaction
with the efficiency of the debates that lasted only two
weeks, rather than the typical one to two months. The
president ratified the legislative package on November 22,
six days before the elections.

3. (SBU) Although the Parliament followed all constitutional
steps in its debate and passage of the budget, many analysts
felt that the process was on the edge of the law. Due to
the incumbent party's desire to have the budget passed prior
to elections, the debate and drafting was superficial and
rushed.

Everyone gains in 2005
-----------------------
4. (SBU) The budget shows overall increases in every area,
although certain ministries benefit to a greater extent than
others. The Ministry of Education and research gains
approximately 29 percent in the new budget, giving it the
largest overall increase. The Ministry of Administration
and Interior was granted the second largest gain, with 28
percent, followed by the National Defense Ministry, with 21
percent more funds next year. With military spending pegged
to a strict 2.38 percent of GDP until 2008, this gain is
primarily a result of projected GDP expansion. Although
everyone wins to a certain extent in this optimistic budget,
lower gains are slated for the Ministry of Justice, with
only a 1.4 percent increase and the Ministry of Labor,
Social Security and Family, with a 5.3 percent increase.

Note: Dollar amounts and percentages have been calculated
using the average forex rate for 2004 compared with the
current exchange rate. The Ministry of Finance's projected
2005 average exchange rate of ROL 35,150 for one USD now
seems implausible due to current market conditions. The ROL
has been on a solid appreciation trend since the central
bank switched to a managed float policy at the end of
October. Today the ROL trades at 28,780 to one USD, a
difference of 22.1 percent with the Ministry of Finance's
prediction for 2005.

Revenue Projections Overly Optimistic
-------------------------------------

5. (SBU) The Parliament based the 2005 state budget on the
following leading indicators, which the IMF reviewed and
sanctioned:
- Consolidated budget deficit of 1.5 percent of GDP, a
decrease from 2004's 1.65 percent deficit target;
- Inflation rate of seven percent, in comparison with 2004's
nine percent;
- Economic growth of 5.3 percent, much lower than the 8.1
percent annualized growth announced for the first nine
months of 2004; and
-Current account deficit not exceeding 5.4 percent of
targeted GDP.

6. (U) Embassy notes that many analysts consider the 2004
growth rate to be at least somewhat exaggerated and
unsustainable, as high agricultural gains due to favorable
weather can be regarded as atypical for the climate patterns
of recent years. The GOR is probably counting on revenue
growth that will not materialize. The GOR may, therefore,
need to increase import duties or issue additional
Eurobonds, as well as raise taxes, to make up revenue
shortfalls.

7. (U) As the basis for its tight budget policy, the ruling
PSD party is counting on a projected 5.3 percent economic
growth, a 10.3 percent increase in investments, lower tax
evasion and higher excise taxes. Year 2005 revenues are
projected at $28.3 billion (31.2 percent of the GDP), while
expenditures are programmed as US$ 29.7 billion (32.7
percent of the GDP). These figures are based on a 2005 GDP
projected to reach US$ 90.8 billion. The state budget will
distribute funds amounting to 6.6 percent of GDP to counties
and municipalities. This is an increase of approximately
12.4 percent over 2004.

Intra-Ministerial Budget Gymnastics
-----------------------------------
8. (SBU) Although the budget law itself is indistinct and
thus does not specify individual projects or programs for
which money will be used, it includes an annex describing
specific projects. This annex presents a more detailed
level of information, often listing the budget indicators
used to arrive at allocation decisions. The budget law
strictly disallows transfers of money between departments or
projects; when needs arise for intra-ministerial money
shifting, a bizarre mechanism is used for reallocation.
Departments in need of cash declare an official emergency,
and then team up with other departments who officially
declare a surplus. Only after these official statements
occur can money be shifted from one area to another. In
practice, intra-department shifts due to emergency
declarations occur frequently. However, inter-ministerial
shifts are much more rare and are approved only under
official ordinance, only three of which occurred so far this
year.

Future Budget Changes Likely Ahead
-----------------------------------
9. (U) PSD MPs and Minister of Finance Mihai Tanasescu
presented the 2005 budget as an instrument of social
welfare. Social spending will reach approximately 30
percent of the total budget expenditures or 9.8 percent of
GDP. Minimum wage is set to increase 11 percent from 2004,
reaching the net equivalent of $108 per month. State sector
wages will increase 12 percent in comparison with 2004. The
new law also stipulates that the GOR will adjust pensions
for inflation on a monthly basis, and that high payroll
taxes will decrease two percentage points from the current
49.5 percent in an almost invisible attempt to discourage
tax evasion.

10. (U) Opposition MPs criticized the majority party's quick
passage of the budget as a means to bolster its election
campaign. National Liberal (PNL) MPs declared that the
economy's growth is a charade, propped up by debt and
foreign remittances. Democratic Party (PD) MPs stated that
the 2005 budget laws passed by the PSD-dominated Parliament
legalize the discretionary allocation of funds based on
waste and populist measures. The political opposition vowed
to enact revised budget laws if successful in winning the
legislative elections.

Comment
-------
11. (SBU) The budget reflects the GOR agreement to the
tight 2005 deficit target proposed by the IMF. However, the
estimated 5.3 percent economic growth is an optimistic
target. In 2004, the unusually high economic growth rate was
due primarily to a surge in agricultural output, a volatile
sector susceptible to unpredictable weather patterns. The
GOR's goal of decreasing inflation to seven percent will
also be a challenge, given rising international energy
prices and increasing wages. The change in the Romanian
leu's (ROL) denomination in the third quarter of 2005 may
also have an effect as the new "heavy" ROL prices (dropping
4 zeros from the currency) are rounded up. In any case, this
is a temporary document, with a new parliament and executive
expected to make substantial amendments once the pressure
and attention of the election season have passed.

Crouch

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